Profit-takers mar pleasing profit results

Small-cap stocks have lost a little bit of steam on the last trading day of the week with good results from a few junior names failing offer much protection from profit-takers.

But Friday’s listless trade that saw the S&P/ASX Small Ordinaries Index slipping 0.1 per cent into the red in the morning is unlikely to worry investors given that the index is up by about 1 per cent over the past five days.

Little World Beverages
(LWB)

One stock that produced a solid half-year result today is micro-brewer
Little World Beverages
, which posted a 35.4 per cent surge in first-half net profit to $4.6 million as sales increased 27.2 per cent to $35.6 million.

Little World is one of the key beneficiaries of changing consumer taste towards premium and craft beers. This trend comes at the expense of large brewers like Foster’s Group, which saw interim earnings before interest, tax, depreciation, amortisation and SGARA (self-generating and recurring assets) in its beer business decline 6.8 per cent over the same time last year.

The small brewer lifted its half-year dividend by 0.5¢ to 5¢ a share and management is expecting a full-year underlying net profit of between $8.3 million and $8.8 million – or about 26 per cent above last year if the mid-point of the guidance is used.

The news initially sent the stock jumping to a record high of $3.56 before profit takers moved in and sent the stock falling 2¢ to $3.46 later in the morning.

The question is whether the stock has the capacity to break above its resistance of around $3.50 as that has capped the stock’s advance over the past month or so.

Related Quotes

Company Profile

Even at the top end of the guidance, the stock is trading on a forecast price-earnings multiple of around 26 times.

Some might argue that its strong growth profile and ability to capture greater market from incumbents warrant a health market premium.

This is not dissimilar to leading internet stocks like
Carsales.com
and
Seek
, which have largely similar net profit growth rates as Little World. But both stocks are only trading on a 2010-11 forecast P/E of 21 times.

While it isn’t totally fair comparing P/Es between a beer company and internet stocks, Little World should arguably be trading at a discount to these web-based leaders given that the popularity of specialty beer is not seen to be a structural issue for the industry (unlike the internet’s impact on media), the higher level of susceptibility Little World has to rivals and the brewer’s lack of size as Carsales.com’s and Seek’s market capitalisation is many times that of Little World’s.

Tassal Group (TGR)

Another stock that is backing away from recent highs is salmon farming company
Tassal Group
.

The stock was trading flat this morning at $1.76 even though it managed to post a 7.9 per cent lift in sales to $222.6 million and a 5.2 per cent increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $29.1 million for the six months to end December 2010.

Both figures were ahead of consensus forecasts and the stock is additionally supported by takeover hopes as a number of parties have been circling the company.

But these factors weren’t enough to lift the stock above last Monday’s near one-year high of $1.80 even though the indicative offer price for the company is believed to be higher.

Perhaps investors are just taking a step back after the stock jumped by close to 25 per cent since the start of the new financial year. On the other hand, investors may have been hoping for an earnings upgrade but that is not likely to come as management said it was comfortable with the median net profit forecast from brokers of around $23.7 million.

This would put the stock on a P/E of 11 times – which is close to a 30 per cent discount to other food producers. The stock can’t be accused of being expensive, but some may be reluctant to call it cheap given the execution risks involved in its strategic plan to turn around its business. This isn’t expected to be completed until 2014-15.

The stock fell 9.1 per cent, or 1¢, to 10¢ this morning even though the company reported a 71 per cent surge in sales to $25.4 million as underlying earning earnings before interest and tax climbed 49 per cent to $2.3 million.

The solid top-line growth is pleasing considering that the price of solar panels had been falling and government subsidies had been lowered in the December half -ear.

Further, management has lifted the interim dividend to 0.375¢ from 0.25¢ a share in the previous corresponding period.

However, losses on the company’s currency hedging contracts and a higher tax rate meant that the company’s reported net profit tanked 41 per cent to $925,000.

Investors might also be wary of the fact that management has declined to give a guidance, although it is likely that its full-year net profit figure will come in well below last year’s $4.8 million unless there is a stunning pick-up in the second half.